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GST/HST deemed trust loses priority in CCAA reorganization

In Century Services Inc. v. Canada (Attorney General)1, released just before Christmas 2010, the Supreme Court of Canada overturned the prevailing case law that held that the deemed trust created in favour of the Crown under the Excise Tax Act (ETA) for collected but unremitted amounts of Goods and Services Tax/Harmonized Sales Tax (GST/HST) survived in the context of a Companies' Creditors Arrangement Act (CCAA) reorganization. The much-anticipated decision now establishes clearly that the Crown's GST/HST deemed trust priority is lost under the CCAA.

Background

The facts of the case are as follows: In 2007, Ted LeRoy Trucking Ltd. (LeRoy) filed for protection under the CCAA before the B.C. Supreme Court and obtained a stay of proceedings in order to be in a position to reorganize its business. Among Leroy's debts was an amount for GST/HST collected but not remitted to the Crown. Although the CCAA chambers judge approved a $5 million payment to Leroy's major secured creditor, the judge also ordered Leroy to hold back an amount equal to the unremitted GST/HST and to segregate it in the CCAA monitor's trust account pending the outcome of the reorganization.

When it became clear that a CCAA reorganization was not feasible, LeRoy sought leave of the court to make an assignment in bankruptcy under the Bankruptcy and Insolvency Act (BIA). The Crown sought an immediate court order to pay the Receiver General the unremitted GST/HST held by the CCAA monitor, since, according to the Crown, the ETA deemed trust trumped the CCAA.

The B.C. Supreme Court concluded that it was the BIA that should be applicable in this context. Since both the ETA and the BIA explicitly deny the application of the GST/HST deemed trust in the context of a bankruptcy, the Crown's request was rejected. On appeal, the B.C. Court of Appeal overruled the lower court decision and concluded that once the CCAA reorganization had failed, the chambers judge was obliged to apply the deemed trust rule under the ETA because "[t]here was no longer any purpose under the CCAA to prevent the Crown from exercising its rights under the deemed trust or from receiving the funds being held in trust." Moreover, the Court of Appeal also found that an "express trust" in favour of the Crown had been created by the chambers judge when the GST/HST monies were segregated during the CCAA proceedings.

The dispute centred on what initially looked like an irreconcilable conflict between the ETA and the CCAA. On the one hand, subsection 222(3) of the ETA specifically provides that the GST/HST deemed trust operates "[d]espite any other . enactment of Canada (except the Bankruptcy and Insolvency Act).". On the other hand, subsection 18.3(1) of the CCAA [now section 37] states that, subject to certain specific exceptions (including the deemed trusts for unremitted source deductions under the Income Tax Act, the Canada Pension Plan and the Employment Insurance Act, but not the ETA deemed trust), deemed trusts in favour of the Crown do not operate under a CCAA reorganization. While the CCAA provision is more specific, many practitioners considered that the more recent enactment of the ETA provision signified an implied repeal of section 18.3 of the CCAA. Indeed, this line of reasoning was followed by the Ontario Court of Appeal in its 2005 decision in Ottawa Senators Hockey Club Corp. (Re) (2005)2, where the Court stated that Parliament had made a deliberate choice in subsection 222(3) of the ETA by explicitly mentioning the BIA but not the CCAA. As such, the Ontario Court of Appeal found that Parliament had, by implication, repealed the more specific and earlier in time CCAA provision. Many practitioners believed that the conflict between the ETA and the CCAA had been put to rest. However, as the majority decision of the Supreme Court illustrates, this decision was, in many ways, problematic.

The Supreme Court of Canada decision

After analysing the history of the CCAA and "its function amidst the body of federal insolvency legislation enacted by Parliament," as well as certain jurisprudential principles, the judgment of the majority delivered by Justice Deschamps considers that Parliament may have "inadvertently succumbed to a drafting anomaly" in adopting the more recent subsection 222(3) of the ETA. Under such an interpretation, Parliament could be seen to have created "a facial conflict only, capable of resolution by looking at the broader approach taken to Crown priorities and by giving precedence to the statutory language of s. 18.3 of the CCAA in a manner that does not produce an anomalous outcome."

The rationale for the majority's decision is based on Parliament's "willingness" to "move away from asserting priority for Crown claims in insolvency law." It also pointed to the "strange asymmetry" that resulted from the prevailing interpretation that gave the ETA priority over the CCAA: that the Crown would retain priority over GST/HST claims during CCAA proceedings, but not in BIA proceedings, a circumstance which would encourage statute shopping by secured creditors in cases where the debtor's assets could not satisfy the claims of both the secured creditors and the Crown. Based on these elements, the majority held unequivocally that the Ottawa Senators decision should be overruled and that no ETA deemed trust survives under a CCAA reorganization.

Justice Fish, in his concurring but separate reasons, refused to characterize the apparent conflict between the two provisions as a "drafting anomaly or statutory lacuna". Rather, he underlined the detailed consideration Parliament had recently given to the Canadian insolvency scheme as well as its decision to preserve subsection 18.3 of the CCAA (now subsection 37(1)) in the course of amendments to the CCAA in 2005, and reasoned that the clear intention this denotes is conclusive. The majority disagreed, however, with Justice Fish's approach regarding the existence in law of a deemed trust in the context of the Canadian insolvency regime. According to Justice Fish, two elements must co-exist in order to be in the presence of a deemed trust in such a context: (i) a statutory provision creating the deemed trust; and (ii) a CCAA or a BIA provision confirming the operation of the deemed trust.

Finally, it is worth mentioning the dissenting opinion delivered by Justice Abella. Based on the Ottawa Senators decision and the "later in time" principle of interpretation, she concluded that subsection 222(3) of the ETA should prevail over the CCAA. The majority rejected her reasons, stating that the 2005 amendments to the CCAA "only emphasize the clear intent of Parliament to maintain its policy that only source deductions deemed trusts survive in CCAA proceedings."

Conclusion

The issue is now resolved: no ETA deemed trust survives under a CCAA reorganization and the reasoning in Ottawa Senators should no longer be followed. In this respect, the Supreme Court's decision should be well received by the legal community, which had already pointedly noted the inconsistency resulting from the Ottawa Senators decision. However, it remains to be seen whether Parliament will enact amendments to the legislation specifically to counteract the Supreme Court's conclusion.

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